ECB’s de Cos: Current Information Suggests That ‘We Still Have Some Way to Go’

22 May 2023

By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s process of monetary tightening is not quite at an end, ECB Governing Council member Pablo Hernández de Cos said Monday.

In a speech at an event in Barcelona, de Cos, who heads Banco de España, said that ‘most of the expected impact on inflation of monetary policy tightening would occur this year and beyond, with the peak of this impact in 2024.’

‘Looking ahead, the process of tightening our monetary policy is already well advanced, although, with the information currently available to us, we still have some way to go’, he said.

Rates, currently ‘in clearly restrictive territory’, will need to remain restrictive ‘for a long time’, and there can be no doubt that monetary tightening will take an economic toll, he cautioned. However, stable prices are monetary policy’s ‘greatest contribution’ to long-term growth, he said.

Underlying price pressures of external origin ‘have been subsiding, while those of internal origin remain high and are gaining importance’, he said. However, cheaper energy, loosened supply constraints and diminished demand ‘will gradually begin to produce downward effects on inflation’, he said.

These downward effects may not mirror the previous upward effects, though, he noted.

Fiscal policy should be compatible with monetary policy, he urged. ‘Otherwise, we run the risk of increasing inflationary pressures in the medium term, which would require a stronger monetary policy response’, he said.

‘As for the transmission of our monetary policy, the latest data confirm that it is being passed on strongly to monetary and financial conditions, while there is still a lot of uncertainty about the intensity and speed of this transmission to the real economy’, he said.